Benefit-Cost
analysis – a comparison of economic benefits and costs to society of
a policy, program, or action.

Bequest Value
– the value that people place on knowing that future generations will have
the option to enjoy something.

Consumer surplus
–the difference between the price actually paid for a good, and the maximum
amount that an individual is willing to pay for it. Thus, if a person is
willing to pay up to $3 for something, but the market price is $1, then
the consumer surplus for that item is $2. This measure approximates,
and is bounded by, the more technically precise measures of economic benefit:
compensating variation or equivalent variation.

Compensating variation
- the amount of money that leaves a person as well off as they were before
a change. Thus, it measures the amount of money required to maintain
a person’s satisfaction, or economic welfare, at the level it was at before
the change.

Complementary
goods – goods that are often purchased together, such as bread and
butter.

Demand curve
– the graphical representation of the demand function. The demand function
relates price and quantity demanded. It tells how many units of a good
will be purchased at different prices. In general, at higher prices, less
will be purchased, so demand curves slope downward. The market demand
function is calculated by adding up all of the individual consumers’ demand
functions.

Demand function
– the mathematical function that relates price and quantity demanded for
goods or services. It tells how many units of a good will be purchased
at different prices. The market demand function is calculated by
adding together all of the individual consumers’ demand functions.

Discount rate
– the rate used to reduce future benefits and costs to their present time
equivalent.

Economic efficiency
– the allocation of goods to their highest relative economic value.

Ecosystem functions
– the physical, chemical, and biological processes or attributes that contribute
to the self-maintenance of the ecosystem; in other words, what the ecosystem
does. Some examples of ecosystem functions are wildlife habitat, carbon
cycling, or trapping nutrients.

Ecosystem services
– the beneficial outcomes, for the natural environment, or for people,
that result from ecosystem functions. Some examples of ecosystem services
are support of the food chain, harvesting of animals or plants, clean water,
or scenic views. In order for an ecosystem to provide services to
humans, some interaction with, or at least some appreciation by, humans
is required.

Equivalent variation
- the amount of money that leaves a person as well off as they would be
after a change. Thus, it measures the amount of money required to
maintain a person’s satisfaction, or economic welfare, at the level it
would be at after a change.

Existence value
– the value that people place on simply knowing that something exists,
even if they will never see it or use it.

Externalities
- uncompensated side effects of human actions. For example, if a
stream is polluted by runoff from agricultural land, the people downstream
experience a negative externality.

Fixed costs
– production costs that are not related to the level of production; also
referred to as overhead costs.

Geographical Information
System (GIS) – a computer mapping system that links databases of geographically-based
information to maps that display the information. For more information,
see www.esri.com.

Market failure
– the inability of markets to reflect the full social costs or benefits
of a good, service, or state of the world. Therefore, markets will
not result in the most efficient or beneficial allocation of resources.

Net economic benefit
– the net economic benefit is the total economic benefit received from
a change in the state of a good or service, measured by the sum of consumer
surplus plus producer surplus, less any costs associated with the change.

Net Present value
– the current value of net benefits (benefits minus costs) that occur over
time. A discount rate is used to reduce future benefits and costs
to their present time equivalent.

Non-use values,
also referred to as “passive use” values – values that are not associated
with actual use, or even the option to use a good or service.

Opportunity Cost
– The value of the best alternative to a given choice, or the value of
resources in their next best use. In regard to time, the opportunity
cost of time spent on one activity is the value of the best alternative
activity that the person might engage in at that time.

Option value
– the value that people place on having the option to enjoy something in
the future, although they may not currently use it.

Producer surplus
– the difference between the total amount earned from a good (price times
quantity sold) and the production costs.

Public goods
– goods that may be enjoyed by any number of people without affecting other
peoples’ enjoyment. For example, an aesthetic view is a pure public
good. No matter how many people enjoy the view, others can also enjoy
it.

Regression analysis
– a statistical process for fitting a line through a set of data points.
It gives the intercept and slope(s) of the “best fitting” line. Thus
it tells how much one variable (the dependent variable) will change when
other variables (the independent, or explanatory, variables) change.

Substitute goods
– goods that you might purchase instead of a particular good. For example,
different types of bread are substitutes for each other.

Supply Function
– the mathematical function that relates price and quantity supplied for
goods or services. The supply function tells how many units of a
good that producers are willing to produce and sell at a given price.

Supply Curve
- the graphical representation of the supply function. Because producers
would like to sell more at higher prices, the supply function slopes upward.

Total economic
value – the sum of all types of use and non-use values for a good or
service.

Use value
– value derived from actual use of a good or service. Uses may include
indirect uses. For example, enjoying a television show about whales
provides an indirect use value for the whales.

Variable costs
– production costs that change when the level of production changes, so
that when more is produced the costs increase; as opposed to fixed costs.

Willingness to
Pay – the amount—measured in goods, services, or dollars—that a person
is willing to give up to get a particular good or service.